7 Things They Don't Tell You About Student Loans
Student loans -- if unpaid even for a short time -- lock you into the only effective debtors' prison existing in the United States. The government's collection rights are something a mobster might admire. Late fees and collection fees are ruinous. Student loans cannot be discharged in bankruptcy, so you'll drag that escalating debt forever. So will parents with PLUS loans, if they lose their jobs and cannot pay. Co-signers face the same potential fate.
Our national story says, "get an education and get ahead." Usually, that works. When it doesn't, the loans can wreck your life. Congress could change that story line, but conservatives (Republicans plus a few Democrats) like things the way they are. Few Americans even know what's going on, unless they fall into this pit themselves.
Students have to take the borrowing risk. Loans have become the only road to the costly classroom door for middle-class families and students paying their own way. But before you sign or co-sign, consider whether a lower-cost school would be a smarter move. Here are seven things you might not know about education loans:
1. The default rate is much higher than the government leads you to believe. Officially, the default rate on federally insured loans is running at 7 percent, up 55 percent from its low in 2003. But this only measures the loans that went into default during their first two years. Also, it doesn't count loans whose payments are being deferred for one reason or another -- for example, financial hardship. Many of those borrowers will default as soon as payments come due again.
In 2003, the Education Department's Office of Inspector General estimated the probable lifetime default rate of federal loans taken out in the late 1990s. The rates range from about 20 percent to 30 percent for students in four-year schools, depending on how long they stayed. For two-year schools, the rate runs at 40 to 42 percent. At for-profit, career schools, 44 to 51 percent.
Borrowers don't sign up for loans intending to cheat. But life deals unexpected blows. Solid citizens can lose jobs, homes, marriages, and health. The smallest possible debt is your best defense.
2. You have no idea how fast an apparently modest student loan can build, if you skip payments. For proof, go to StudentLoanJustice.org, founded by Alan Collinge, or ProjectOnStudentDebt.org, and read the individual stories. There's the $70,000 grad school loan that grew to $102,000, and the $40,000 undergraduate loan now being billed at $152,000.
All of these borrowers made payments once upon a time. When hardship struck, they used the various rescue programs -- payment deferrals, forbearance, loan consolidation, and loan rehabilitation, paying extra interest and fees. But as one New York borrower wrote, "In my 22 years of good faith efforts to pay this thing, I've succeeded only in doubling its size with no end in sight."
When a loan defaults and goes to collection, the monthly charge can run up to 25 percent more than the principal and interest due, and this charge is paid before any of your money goes toward reducing debt.
3. By law, student loans cannot be discharged in bankruptcy. In theory, there's an out. A bankruptcy judge has the option of releasing you if you face severe economic hardship. But that happens rarely and you'll need a lawyer even to have a shot. In one case, a judge refused relief to an orchestra cellist who taught music part-time, on the ground that he could switch to a higher paying line of work.
Earlier this year, Democrats in the House of Representatives advanced a bill that would allow bankruptcy courts to discharge education loans obtained from private lenders, such as banks. All the Republicans voted against it. You can be sure that the new House will not take it up.
4. The government and collection agencies can beat you with tactics not allowed for other types of loans. For example, they can seize tax refunds, garnish up to 15 percent of your disposable income, and seize part of your Social Security or disability payments if you receive more than $750 a month -- all without getting a court order. Many states can also cancel your professional licenses, such as those for teachers, lawyers, and healthcare workers, making it impossible for you to find the work you're trained for.
On federal loans, you can be dunned until you die. States limit the period of time that private lenders have to sue, but once they get judgments they can come after you for years. One reader, a grandmother of six, tells me she is still being harassed. Lenders almost never negotiate a reduced payoff.
5. All the traps that await student borrowers also await parents who take education loans. If you've been hurt financially during these hard times, you're generally stuck with this debt no matter what.
6. You're also at risk if you co-sign a loan and the borrower can't pay. If the student dies or becomes totally disabled, your federal loans can be forgiven. But if you co-sign private loans, they'll come after you forever.
7. There are a few ways out. The Feds and the states offer limited help to students who went to rip-off schools. Part or all of the loan can be cancelled if you take various types of public service jobs -- for example, teaching in a low-income area. States have cancellation programs, too. For a detailed and accurate list of your options, see the excellent Student Loan Borrower Assistance Project, run by the National Consumer Law Center. There's an ombudsman at the U.S. Education Department, but first you have follow certain steps to try to resolve the problem yourself.
Most borrowers, however, won't get help. The Education Department is itself a collection agent, Collinge says, so it's generally not on your side. NCLC attorney Deanne Loonin says that, when representing clients, "I constantly find it hard to get the Department to recognize borrower rights." In general, consumer groups haven't yet stepped up to the plate on this issue. Tens of thousands of lives are being ruined, with Americans unaware.
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